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It appears the country is gradually coming to terms with effects of the current global financial meltdown following Abuja's decision to re-jig the 2009 budget in line with global realities with the new budget cutting down on certain capital projects, banning on oversea courses and purchase of new vehicles during the year, Lucky Fiakpa and Hector Igbikiowubo write.
 Yar Adua Crude oil prices in the international market had risen to all-time high of $147 per barrel in the second quarter of this year and has plunged to $85 per barrel as at last week and even plummeted to a 13-month low of $77.70 per barrel last week on the New York Mercantile Exchange after losing $8.89 a barrel, the second biggest decline ever.
The Federal Government had late last month pegged the benchmark for the 2009 budget at a “comfortable” $62.5 per barrel, but has now realised that based on trend in the international market, the benchmark may be a bit risky.
Consequently, the Federal Government is now having a rethink on the basis of its budget projections for 2009. With oil prices falling faster than expected, government is now set to drop its projected oil benchmark from $62.5 per barrel to a more realistic figure of between $45 and $55 per barrel. Government also plans to cut and remove some items of expenditure in the budget while recurrent, overheads and capital expenditure are being pruned down in the 2009 budget.
Some fundamental changes in the proposed 2009 budget are the cancellation of overseas trainings for federal officials and a ban on the purchase of new cars in 2009. Similarly, there will be no vote for new capital projects for some ministries, departments and agencies (MDAs).
For ministers, permanent secretaries and other top officials of government, a quarterly review of their performance in line with set standards will be undertaken. Other salient aspects of the budget are the allocation of its 85 per cent to priority areas such as power, health, education, the Niger Delta and the Niger River dredging.
Budget Re-work
The rework of the budget is at the instance of President Umaru Musa Yar’Adua who rejected the one prepared by the Budget Office of the Federation. The President has set up a team of technocrats headed by the Minister of State for Finance, Mr. Remi Babalola, with a mandate to review the proposed budget, synchronise it with the current global trends and ensure less friction with the National Assembly when presented to the Legislature. It was gathered last week that the development is responsible for the delay in the presentation of the Appropriation Bill to the Legislature.
Finance Minister Dr. Shamsudeen Usman was supposed to send the bill to the National Assembly last weekend but could not do that as a result of the emerging developments. Members of the committee retooling the budget include the Minister of National Planning Commission (NPC), Senator Sanusi Daggash, the Director-General of the Bureau for Public Procurement and Budget Monitoring, Mr. Emeka Eze and the Permanent Secretary, Federal Ministry of Finance, Mr. Steve Oresanya, among others. They are working under the guidance of the Secretary to the Government of the Federation (SGF), Alhaji Yayale Ahmed.
The committee went into action last week with the invitation of some MDAs to defend their proposals. It is expected to conclude the review of the budget soon so that President Yar’Adua can begin its execution on January 2, 2009. To achieve this, the executive arm of government plans to carry the National Assembly along.
The President had two weeks ago ordered Ahmed to set up an Inter-ministerial committee chaired by Minister of State for Finance, Remi Babalola, to re-work the 2009 budget. “The 2009 budget, which is now at an advanced stage, is expected to be presented soon to the Federal Executive Council (FEC), which will approve it for the President to send it to the National Assembly,” he said.
The inauguration of the inter-ministerial committee was in response to complaints and protests by some ministers to the President over the allocations to their ministries in the 2009 budget. The proposed 2009 budget will be anchored on a daily crude production of 2.3 million barrels per day (bpd) as against the 2.45 million bpd at a benchmark price of $59 per barrel.
Excess Crude Account
The excess crude account was created to take care of hard times in the event of a possible oil price drop below the budgeted price. But according to the CBN governor, much of the savings in the excess crude account has been disbursed and what is left based on what the three tiers of government in the country agreed on will not be enough to make any significant impact on the budget if the price of oil falls below the budget bench mark.
Soludo said further that the growth of the excess crude fund was likely to contract as part of the fund – about $5.6 billion – had been dedicated for the development of the power sector, while state governors, under political pressure to deliver social goods, had agreed to share 80 per cent of funds in excess of a base reserve of N1 trillion.
He noted that the sharing arrangement was a constitutional matter but that the 20 per cent of any funds accruing in excess of the N1 trillion reserves would be ploughed back into the excess crude account.
So far, N1.72 trillion is said to have been shared by the three tiers of government from the excess crude account. Reports have it that N592 billion was shared in May while another N569.79 billion and N562 billion respectively was shared in June and July.
More than just using the allocations from the excess crude account to provide social amenities by the government, a new use has been found for it. With drop in the production level of oil which had resulted in the drop of crude export as a result of the activities of the militants in the Niger Delta, part of the savings had been used to supplement the revenue allocation to the three tiers of government in months when available revenue fell short of the budgetary provision.
In the month of September, the sum of N31.4 billion was taken from the excess crude account to augment the budgetary shortfall for the month. The budgetary shortfall was due basically to the shut-ins and vandalisation of pipelines which had an adverse effect on the volume of production. The essence of augmentation is to enable the three tiers of government to continue with their projects despite price fluctuations or reduction in the volume of production.
The amount of money that is allocated to each state is standardised, the highest recipients in the second disbursement for augmentation during the meeting of the Federation Account in September 2008 are mostly oil producing states of Rivers, which received N20.7 billion; Akwa Ibom, N14.7 billion; Delta, N10.7 billion; Bayelsa, N9.2 billion and Ondo, N6.7 billion. In the second allocation from the augmentation, Rivers received N1.8 billion; Akwa Ibom, N1.3 billion; Delta, N932 million; Bayelsa, N853 million and Ondo, N551 million.
The highest recipients from non-oil producing states are Lagos, N9.7 billion; Kano, N9.1 billion; Katsina, N6.6 billion and Oyo, N6.4 billion. In the next table from the augmentation, Lagos received N477 million; Kano, N635 million; Katsina, N473 million and Oyo, N456 million.
The least recipients with less than N4 billion are Ekiti, N3.8 billion; Nasarawa, N3.6billion; Gombe, N3.7billion and Ebonyi, N3.5 billion. Also in the second allocation for augmentation, Ekiti received N668 million; Nasarawa, N656 million; Gombe, N658 million and Ebonyi, N632 million.
The September disbursements also included Federal Government, N177 billion; and Federal Capital Territory councils, N1 billion.
The essence of augmentation is to enable the three tiers of government to continue with their projects despite price fluctuations or reduction in the volume of production.
Crude Oil Output
Crude oil output of Nigeria’s largest upstream oil and gas exploration and production company, Shell Companies in Nigeria (SCiN), has dropped from an all time high in excess of 1.0 million barrels per day to an average 412,000 barrels per day owing to militancy in the Niger Delta and funding constraints.
Similarly, operating expenditure of the group in the country has gone up sharply recording $6.99 per barrel in 2007, with security costs alone accounting for $4.29 per barrel during the period under review.
Shell Petroleum Development Company (SPDC), one of the companies in the SCiN group and operator of the NNPC/SPDC Joint Venture estimates that out of the average 412,000 barrels per day production projected for this year, 275,550 b/d would come from the Bonny Light system.
A United Kingdom based publication, Menas Associates disclosed however, that another planning scenario shows that output could be static at about current levels for over two years and gas production could suffer as a consequence.
The 2008 figures represent a further deterioration in production performance in recent years. In 2007 the production of crude ‘lost’ or deferred amounted to an average of 614,000 b/d. In 2006 the volume deferred as a result of third parties and operations amounted to 528,000 b/d.
It was gathered that even though there has been some success in the restoration of some output volume in the badly hit Western division of Shell operations, where approximately 200,000 b/d of capacity has been restarted, security conditions in the Niger Delta remains challenging.
For instance, it now appears certain that the Forcados rehabilitation programme will be extended into 2009 and the big challenge to come is the re-opening of the key Trans-Ramos pipeline which sustained damage at seven key points.
Other restoration work scheduled for 2008 includes the re-opening of four of the company’s key facilities – Benisede, Opukushi, Tunu and Jones creek – all in the third quarter of this year.
The restoration programme also includes the Forcados terminal and the repair of Flow-lines in the highly vulnerable northern swamp area. Left in abeyance till 2009 are the restoration of six key facilities – Odidi 1, Odidi 2, Egwa 1, Egwa 2, Batan and Ogbotobo.
Faced with funding constraints, the big challenge for Shell in Nigeria would be how to continue restoration work when the NNPC has not contributed its counterpart JV funding.
Financial Vanguard learnt that as with all other operators, Shell cannot suspend its activities until funding issues are sorted out, an indication that it may have to carry out these expenditures in the hope of later recovery.
Meanwhile, SPDC’s planning is also challenged by an escalation in its operating cost as a result of the Niger Delta crisis. Figures show that cost per barrel jumped in 2007 as the production shut-ins took effect in the Western division. SPDC calculates that the company’s per barrel cost averaged $6.99 per barrel in 2007 in which security costs accounted for $4.29 per barrel.
Even without the impact of the Niger Delta crisis, there are indications that operating expenditure (opex) costs are rising due to the increased cost of managing recovery from some reservoir. For 2008, the SPDC had proposed a JV budget of $5.3 billion but the NNPC through NAPIMS capped spending at $2.94 billion.
The unexpectedly low ceiling is indicative there will be little oil and gas growth by SPDC in 2008 while the flares down programme would be impacted by the lack of funds.A government official justified the shorter budget citing security challenges in the Niger Delta operating environment.
Similarly, NAPIMS and Shell agreed that larger volumes may be shut-in in the course of the year owing to the activities of insurgents in the area.
This scenario looks quite frightening. But it appears the worse is yet to come. With high oil prices, the search for an alternative has been intensified and has become a major campaign issue in the US election. Barack Obama has promised to invest $10 billion a year for over a period of 10 years for research for alternative to oil.
This, Soludo said, had very far-reaching implication for Nigeria which mainstay is oil. Vanguard had reported exclusively three weeks ago that studies had shown that oil prices might drop to $50 per barrel. If that happened, the 2009 budget being predicated on $63 per barrel will fall short of budget expectation by $12 a barrel.
Should the country gets to this pass, Soludo believes that “almost everybody will be affected one way or the other. So far as you have trade links commodity, prices are going to fall because of declining demand in the major markets, and with the fall in commodity prices we have already seen a 40 per cent fall in crude oil prices.
“It is almost at $80 and if you will recall we went above $120. Other commodity, prices copper, cocoa are going to be affected as the global demand falters,” he stated.
He further stated that one of the issues that were discussed at the just concluded annual meeting of the IMF/World Bank was climate change which in the long run was going to have a far-reaching implication for the country. He said the focus of the world now was how to save the environment which had led to the search for alternative to fossil fuel.
Word of Caution
Against this backdrop, Managing Director, World Bank, Dr. Ngozi Okonjo-Iweala, last week caution the nation’s economic managers to ensure proper utilisation of resources as the effects of the global food, fuel, fertiliser and financial crisis could spell doom for the country if care was not taken.
Okonjo-Iweala stated this during interactive session with journalists attending the World Bank and International Monetary Fund (IMF) annual meetings in Washington D.C., USA.
She said this was the time for proper resource management and continuation of economic reforms because the crisis had the effect of drying up liquidity and investment flows as well as a contraction in commodity prices, which the World Bank, in a revised forecast, said were likely to drop by between 20 and 25 per cent in the last quarter.
The former Nigeria Finance Minister noted that demand for oil could fall if most of the developed world goes into recession. Other possible effects are decreased capacity flows, drying up in liquidity and diminished aid delivery. Already, some oil-producing countries are witnessing a shortfall in remittances, capital flight, decrease in portfolio flow and Foreign Direct Investment (FDI), she explained.
She therefore advised that the country’s decisions in various sectors of the economy at this critical period should be technically sound. “It means you have to be very prudent with your budget. As you know in Nigeria, we have the fiscal rule where we budget at an oil price below the prevailing price in the market.
“But the oil price I think being used is about $62. If oil is coming down and it’s about $82, you can make your own deduction. I will be very prudent because if oil price goes much lower, then you are going to have constraints,” she was quoted to have said.
She encouraged the Nigerian government and other African countries, which had commenced economic reforms, not to pull back but rather continue on the same course to sustain growth and enhance service delivery.
She stated that Nigeria, as an oil exporting country, ought to be mindful that the world was now searching for alternative sources of fuel and should therefore focus on diversification into agriculture, finance, solid minerals and tourism, among others.
She also advised Nigerian banks in the light of the ongoing global financial crisis to be mindful of how they borrow from foreign sources, as this would increase their exposure to such sources and the crisis within them.
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